Rail Industry Overview and Trends

Transcription

1 Rail Industry Overview and Trends A Report to CSCMP 2006 Tom O Connor Snavely King Majoros O Connor & Lee th St. NW Suite 300 Washington, DC Phone skmoltom1@aol.com October 17, 2006

2 Four Key Rail Trends I Intermodal: Dramatic increases Surging growth in Asian economies leads to higher US rail volume with lower rail profits per unit - Capacity is a key issue II Rail Economics: Costs And Rates - Their use in negotiations and regulatory settings III Rail Regulation and Competition Fuel Surcharges Legislative and Regulatory Initiatives IV. Mergers And Strategic Alliances mergers may be coming and strategic alliances have already arrived

3 I. Macro Rail Industry Overview Increasing importance of Intermodal Relatively weaker profit position of Intermodal rail industry wide; BNSF appears to be an exception Strategic Alliances of Rail and Truck Schneider allies with BNSF and with CSX in Intermodal JB Hunt first quarter revenue was 41 % Intermodal Intermodal now 23% of Rail Revenue, more than Coal Relative cost advantage of rail over truck increases as fuel cost rises

4 Recent Trend: Increasing importance of Intermodal Jan 06 to Aug 06: Intermodal up 6.4% and Carloads up 1.5% Railroads Pursued Intermodal Cost Subsidy by Federal Government - A response to Revenue Constraints on Intermodal.

5 Long Term Trend: Increasing importance of Intermodal Source: AAR, Traffic World Intermodal growth can absorb railroad capacity and cut into carload service

6 The Highway Network: Approaching and Exceeding Capacity Chart Source: Batelle Highways over-capacity are shown in red for 1998 and forecast 2020 Highways approaching capacity shown in blue for 1998 and forecast 2020

7 Factors Affecting Railroad Capacity In The Future: Import/Export And Intermodal Increasing use of back haul to reduce cost and increase capacity Tropicana back hauling other products to FL Projected growth in Intermodal is both welcome and a concern to Railroads Volume levels up and profit levels down

8 Long Term Shifts In Production Have A Major Impact On Domestic Transportation Mexico is the second largest US trade partner and has growing importance in trade with Asia Continued Impact On Freight Flows Of Long Term Shifts In Domestic Industrial Production US Trade Deficit with China was $202 Billion in 2005 US Trade Balance Was Running At Annual Deficit Of $763 Billion As Of April % Higher Than The Record $717 Billion US Trade Deficit In 2005 Chemical Business: persistent shifts of domestic production overseas $100 $80 $60 $40 $20 $ Trade Balance (right axis) Exports (left axis) Imports (left axis) Trade Balance Trend Line Source: US Department of Commerce $25 $20 $15 $10 $5 $0 ($5) ($10)

9 Long Term Shifts In Production Have A Major Impact On Intermodal Volumes and Port Congestion Continued Impact On Freight Flows Of Long Term Shifts In Domestic Industrial Production US trade showed a deficit with China of $19.6 billion in July 2006; 12 months at this level would yield a US deficit of $240 billion; 20% above the US deficit in 2005 Monthly US deficit worldwide was $68.0 billion in July 2006 US Deficit

10 II. Rail Economics: Costs And Rates Commodity Comparison Compare rail rates to other rail shipments of the same commodity Year over Year comparison Compare year over year change in rail rate Rail Profitability; Revenue Cost Ratios ( RCR ) RCR is Revenue divided by variable cost RCR estimates the profit the railroad realizes from each rate. RCR is used for regulatory purposes at the Surface Transportation Board ( STB )

11 The Profitability of US Rail Shipments Varies Widely as measured by Rail Revenue divided by Rail Cost (RCR) Revenue Cost Ratios: Commodities with $2 Billion or More in Revenue Source: STB; 2004 Waybill Sample Total Rail Freight 135% Misc. mixed shipments ex. forward Transportation equipment 118% 127% Chemicals 164% Food and kindred products 119% Coal 145% Farm products 150% 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% Revenue Cost Ratio: Rail Revenue Divided by Rail Variable Cost

12 Converting Chemical Shipments From From Domestic Rail Rail Carload to to Intermodal Import Import Can Can Lead Lead to to Dramatic Changes in in Rail Rail Rates Rates To This From This Revenue Revenue Cost Cost Ratio Ratio is is railroad railroad revenue revenue as as a a percentage percentage of of railroad railroad cost. cost. Misc. Misc. Mixed Mixed is is Primarily Primarily Intermodal Intermodal

13 III. Rail Regulation and Competition Initiatives At Surface Transportation Board (STB) Two major STB initiatives will impact Shippers Fuel Surcharge Railroads Reporting Fuel Revenue and Cost to STB Fuel Surcharge linked to Fuel Cost Small Shipment Rate Case A Rulemaking to redefine procedures Reflects a more proactive approach

14 14% 2005 Average Fuel Surcharge Compared to 2005 Change in Fuel Cost 13% 13% 13% 12% 12% 11% 11% 10% 8% 6% 4% 5% 4% 3% 5% 4% 2% 2% 0% BNSF CSXT KCS NS UP Total Source: Railroad SEC filings and Company websites 2005 Average Fuel Surcharge Change in Fuel Cost as % of Total Cost

15 Fuel surcharges claimed by the BNSF and the UP are virtually identical. Fuel surcharges claimed by KCS, NS and CSXT are also virtually identical. In contrast with this uniformity, fuel cost as a percent of operating cost differs widely 20.0% US Class I Railroad Fuel Surcharge: BN and UP 20.0% US Class I Railroad Fuel Surcharge: CSXT NS and KCS 18.0% 18.0% 16.0% 16.0% 14.0% 14.0% Fuel Surcharg e 12.0% 10.0% 8.0% Fuel Surcharg e 12.0% 10.0% 8.0% 6.0% 6.0% 4.0% 2.0% 0.0% Source: Class I Railroad Websites Jan-04 Feb-04 M ar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 BNSF N ov-04 D ec-04 Jan-05 Feb-05 M ar-05 Month Apr-05 UP May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May % 2.0% 0.0% Source: Class I Railroad Websites Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 O ct-04 Source: Railroad SEC filings and Company websites Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 Month CSXT NS KCS May-05 Jun-05 Jul-05 Aug-05 Sep-05 O ct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 M ay-06

16 Rail Costs as measured by RCAF are very similar with and without fuel RCAF-A is Rail Cost Adjusted for Productivity Costs and Productivity and Fuel all as Measured by Rail Industry RCAF U (Unadjusted) RCAF-U Less Fuel Un Adjusted For Productivity RCAF A (Adjusted) RCAF-A less fuel Adjusted For Productivity RCAF-U 2002 Q4 = Adjusted or Unadjusted, There is Little Difference Between RCAF With Fuel and RCAF without Fuel RCAF-U is Rail Cost Adjustment Factor Without Reflecting Productivity Gains

17 Railroad Financial Performance Union Pacific, the largest US railroad 70 percent growth in 2005 net income to $1.03 billion, Revenue jumped 11 percent to $13.6 billion. Burlington Northern Santa Fe, second-largest US railroad, 93 percent growth in 2005 net income to $1.5 billion, Revenue of $13 billion, up 19 percent, for CSX, the third largest US railroad 237 percent growth in 2005 net income to $1.2 billion Revenue increased 7 percent to $8.6 billion. Norfolk Southern, the fourth largest US railroad 39 percent growth in 2005 net income to $1.3 billion Revenue rose 17 percent to $8.5 billion.

18 IV. Mergers and Strategic Alliances Major US Ports And Metropolitan Areas With Populations Greater Than 1 Million People

19 Rail service via Mexican Ports is a Response to US West Coast port congestion The Mexican ports and the Meridian Speedway Joint Line links to NS and targets service to East Coast population centers and rapidly growing Intermodal freight This could foreshadow major shifts in rail flows IV. Mergers And Strategic Alliances Ports of Los Angeles and Long Beach handle: 70% of cargo moving between Asia and the US 40% of total ocean cargo shipped to US every year from the world.

20 KCS Estimates

21 Most Observers See Virtually no Network Redundancy left in the Rail System Segments of many mainlines at capacity Operating issues in some terminals Recurring shortage of crews due to retention and training challenges Need to acquire and refit locomotives The Railroad Metrics tell the Story

22 Rail Mergers: Lessons for the future Continued high demand Traffic is up Freight volumes expected to double in 20 years Increasingly, new highways are a non-starter Railways will have a bigger role If they can do the job Source: Jim McClellan NS Sr. VP Strategic Planning June 2004 Strategic Alliances Are an Alternative to Mergers Source: Tom O Connor VP SK October 2006

23 Major Independent Railroads CP CN UP BNSF KCS NS CSX TFM FXE

24 Major Independent Railroads Showing Some of the Rail Strategic Alliances CP CN UP G BNSF KCS CSX NS TFM FXE Alliance

25 Four Key Rail Trends I Intermodal: Dramatic increases Surging growth in Asian economies leads to higher US rail volume with lower rail profits per unit - Capacity is a key issue II Rail Economics: Costs And Rates - Their use in negotiations and regulatory settings III Rail Regulation and Competition Fuel Surcharges Legislative and Regulatory Initiatives IV. Mergers And Strategic Alliances mergers may be coming and strategic alliances have already arrived

26 Background on Snavely King Snavely King Majoros O Connor & Lee has provided consulting services to the Rail Industry, rail shippers and hundreds of other clients in transportation, telecommunications and utilities in the US, Canada and Overseas. For more than three decades SK has built its success on developing and applying practical market and economic solutions for its clients. The firm's financial and strategic advice is backed by the professional staff's wide experience in designing and applying business solutions, evaluating corporate transactions, analyzing start-up companies, and in providing strategic planning services to commercial, institutional and government clients. In more than 2,000 projects, the analyses and expert advice provided by SK have significantly assisted both private and public sector clients.

27 Tom O Connor o Tom O Connor is Vice President of Snavely King Majoros O Connor & Lee, an economic and management consulting company. He has been engaged in the business of economic analysis for more than thirty years, beginning as an economist with the Interstate Commerce Commission (now the Surface Transportation Board) and subsequently in economic consulting and management positions of increasing responsibility with: The United States Railway Association as Manager of Local Rail Services Planning Conrail as Assistant Director of Costs and Economics Association of American Railroads as Assistant Vice President of Economics DNS Associates as Vice President, and since 1988 with Snavely King Majoros O Connor & Lee as Vice President Tom O Connor s practice centers on transportation with specific focus on negotiations and infrastructure issues including rationalization and redesign of the railroad infrastructure in the US as well as rebuilding of the railway infrastructure in Eastern Europe. Mr. O Connor s work in the Balkans in Eastern Europe focused on both transportation and telecommunications. Tom O Connor has provided testimony on a wide range of issues in proceedings before courts and regulatory commissions in the United States and Canada including: Interstate Commerce Commission; Surface Transportation Board; United States Railway Association; Regulatory Commissions in New York, Indiana and Pennsylvania; State Courts in Indiana, Montana and Virginia; Arbitration Panel in New York; Mediation Panels in Massachusetts and Washington DC; Canadian Crown Commission; US District Court for Eastern District of Virginia, and US District Court for Arizona Military- US Army - Combat Engineers o Education- Economics BA and Graduate - Phi Beta Kappa